Citi: Ups Tencent, Baidu TP; Downs Qihoo – Too Green

By Shuli Ren

Citi has a new lead analyst for its China Internet sector. As always, there is a transfer of coverage. The new analyst, Thomas Chong, has quite a different take on how we should value China’s Internet companies.

According to Chong, Chinese Internet companies should be valued on a PEG (P/E versus earnings growth) basis instead of the prior discounted cash flow model, as “we believe earnings growth in the medium term can best capture the performance of Internet companies amidst the fast-changing developments of the sector.”

Citi now has a 144 Hong Kong dollar price target for Tencent (0700.HK/TCEHY), up from HK$96. The new team applied a 1.2x PEG ratio on HK$4.2 2015 earnings, expecting an annualized 20% growth rate. Tencent closed at HK$124.5 in Hong Kong today.

The bank now has $245 price target for Baidu (BIDU), up from $215. The team also revised up their 2014 and 2015 earnings by 5% and 11% respectively. The new price target is based on 1x PEG, with $7.71 2015 earnings and 32% annualized growth rate in the next three years.

As for Qihoo 360 (QIHU), there are many things to like. For instance, “We expect Qihoo to reach high single-digit market share in terms of revenue in 2015,” or “compared to mobile games developers, we believe Qihoo faces lower risks given its platform for mobile games distribution.” But Qihoo is too young. It does not have enough operational history to show for. As a result, “we apply 40% discount to PEG on its short history in search and mobile monetization.” The new price target of $114.1, from $165 before, is based on 0.6x PEG, with $4.32 2015 earnings and 44% annualized growth rate. The previous price target implied 0.9x PEG.

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There are 7 comments

JULY 24, 2014 11:03 A.M.

citisucks wrote:

if pt was $165 a few months ago, it should be even higher now, NOT down to $114.1 because the company now is a few month older than a few months ago.

JULY 24, 2014 11:35 A.M.

Citicsucks2 wrote:

Agreed!

JULY 24, 2014 1:37 P.M.

Citisucks3 wrote:

Agreed!

JULY 24, 2014 2:02 P.M.

robert wrote:

this one is as lame as they get

JULY 24, 2014 4:47 P.M.

citisucks 3 wrote:

I thought Thomas Chong & Cheech were back together. I'm long QIHU & predict higher PPS than Chong- he's been tokeing to much!

JULY 24, 2014 4:49 P.M.

Long QIHU wrote:

I thought Thomas Chong & Cheech were back together. I'm long QIHU & predict higher PPS than Chong- he's been tokeing to much!

JULY 24, 2014 10:05 P.M.

skip it wrote:

I don't understand it and never will when it comes to Qihu.That is to say these quote experts keep lowering or
trashing on Qihu and they best the estimates everytime? I too am long on this one,its in my retirement accounts and I just picked up another 500 shares in another acoount.We will see what happens end of august when they report.If I was a betting man I would bet they beat estimates again.Hang in there guys and don't let these experts rent space in your heads.

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